Zimbabwe Stock Exchange Braces for Decline Amid Currency Reforms

Zimbabwe's stock exchange faces slowdown as new currency reforms take effect, with the central bank aiming to increase ZiG usage and stabilize the volatile exchange rate, crucial for economic recovery and foreign investment.

Trim Correspondents
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Zimbabwe Stock Exchange Braces for Decline Amid Currency Reforms

Zimbabwe Stock Exchange Braces for Decline Amid Currency Reforms

The Zimbabwe Stock Exchange (ZSE) is expected to experience a slowdown in activity, looms in the coming weeks as investors, primarily institutional, adjust their systems to align with the new monetary policy measures introduced by the Reserve Bank of Zimbabwe. The central bank's policy framework includes adopting a market-determined exchange rate system, efficient money supply management, introducing a new, currency, like structured currency called the Zimbabwe Gold (ZiG), and anchoring the local currency on gold and foreign currency reserves.

Research firms anticipate the ZSE to maintain current price levels in US dollars in the immediate term due to the central bank's tight monetary policy stance. However, they remain bullish on the ZSE compared to the Victoria Falls Stock Exchange (VFEX) as the governor aims to increase the share of transactions denominated in the new ZiG currency to 30% by the end of the year, potentially improving liquidity on the ZSE.

The ZSE has recorded its lowest weekly turnover to date, while trades in Simbisa, Innscor, and Padenga have sustained the VFEX with a weekly turnover of nearly US$800,000. The latest addition to the VFEX, Edgars, started on a bullish note, gaining 36% in its first week. Inter Horizon Securities noted that the ZSE will need to rebase to the new currency, which may result in initial distortions in valuations, and they recommend leaning towards defensive stocks with strong dividend policies in case valuations remain distorted, impacting capital gains.

Why this matters: The currency reforms in Zimbabwe have far-reaching implications for the country's financial markets and economy. The introduction of the ZiG, backed by gold and foreign currency reserves, aims to stabilize the volatile exchange rate that has plagued the retail sector and given an advantage to informal traders. The success of these measures will be essential in restoring confidence in Zimbabwe's economy and attracting foreign investment.

The Zimbabwean government's efforts to address the long-standing currency crisis have led to the introduction of the ZiG, effectively a revalued Zimbabwean dollar. The central bank has reset interest rates from 130% to 20% to support the new currency and spur growth. While the ZiG has gained 1.5% against the US dollar in its first week of trading, concerns persist about the potential emergence of a parallel currency market, threatening its exchange rate stability.

The Reserve Bank of Zimbabwe has also adjusted the foreign currency statutory reserve ratio on demand deposits, increasing it from 15% to 20% while maintaining the current level of 5% for foreign currency time and savings deposits. This move is aimed at managing liquidity in the foreign exchange market and stabilizing exchange rates. Economic analysts view the policy change as a prudent measure to address imbalances in the foreign exchange market and promote sustainable economic growth.

Key Takeaways

  • ZSE activity expected to slow as investors adjust to new RBZ monetary policy measures
  • RBZ introduces new currency ZiG, anchored on gold and foreign currency reserves
  • ZSE to maintain USD price levels, VFEX gains traction with new listings like Edgars
  • Currency reforms aim to stabilize exchange rate, restore confidence and attract investment
  • RBZ increases foreign currency reserve ratio to manage liquidity and stabilize exchange rates